IRS grants reasonable-cause relief for a corporation that missed its S election deadline

Plain-English summary

A corporation that wants to be taxed as an S corporation must file Form 2553 within a set window (generally by the 15th day of the third month of the target year). Here the company's sole shareholder intended for it to be an S corporation from a specific date but the company inadvertently failed to file the election on time. It asked the IRS for relief under § 1362(b)(5), which lets the IRS treat a late or missing S election as timely if there was reasonable cause for the failure. The IRS found reasonable cause and ruled that the election will be treated as timely if the company files a completed Form 2553 (with the intended effective date) within 120 days of the letter. The IRS expressed no opinion on whether the company otherwise qualifies as an S corporation. This is the routine fix for a small business that meant to elect S status but missed the filing deadline.

Ruling snapshot

• Question: Was there reasonable cause under § 1362(b)(5) to treat a late S corporation election as timely made?
• Outcome: approved (election treated as timely if Form 2553 is filed within 120 days)
• Key authorities: IRC § 1362(a), (b)(1), (b)(3), (b)(5)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202048004                                              Third Party Communication: None
Release Date: 11/27/2020                                       Date of Communication: Not Applicable
Index Numbers: 1362.00-00, 1362.01-00,
              1362.01-03                                       Person To Contact:
                                                               ----------------------, ID No. ------------------
----------------------------------------                       Telephone Number:
------------------------------------------------------------   (202) 317-5279
-----------                                                    Refer Reply To:
-------------------------------------                          CC:PSI:B03
----------------------------------------                       PLR-106109-20
                                                               Date:
                                                               August 31, 2020




Legend

X        =    ----------------------------------------.
              ------- ----------------

A        =    --------------------------------
              -------- -----------------

Date =        -----------------

State = -------------


Dear --- ------------------------:

       This letter responds to a letter dated January 24, 2020, and subsequent
correspondence, submitted on behalf of X, requesting a ruling under § 1362(b)(5) of the
Internal Revenue Code (Code).

                                                     FACTS

       The information submitted states that X was incorporated under the laws of State
on Date. A, X’s sole shareholder, intended for X to be an S corporation effective Date,
but X inadvertently failed to timely file a Form 2553, Election by a Small Business
Corporation.

                                                 LAW AND ANALYSIS

      Section 1362(a)(1) provides that, except as provided in § 1362(g), a small
business corporation may elect, in accordance with § 1362, to be an S corporation.
PLR-106109-20                                2

       Section 1362(b)(1) provides that an election under § 1362(a) may be made by a
small business corporation for any taxable year (A) at any time during the preceding
taxable year, or (B) at any time during the current taxable year and on or before the
15th day of the third month of the taxable year.

       Section 1362(b)(3) provides that if (A) a small business corporation makes an
election under § 1362(a) for any taxable year, and (B) the election is made after the
15th day of the third month of the taxable year and on or before the 15th day of the third
month of the following taxable year, then the election is treated as made for the
following taxable year.

       Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for
any taxable year (determined without regard to § 1362(b)(3)), after the date prescribed
by § 1362(b) for making the election for the taxable year or no § 1362(a) election is
made for any taxable year, and (B) the Secretary determines that there was reasonable
cause for the failure to timely make such election, the Secretary may treat such an
election as timely made for the taxable year (and § 1362(b)(3) shall not apply).

                                     CONCLUSION

        Based on the facts submitted and representations made, we conclude that X has
established reasonable cause for failing to make a timely election to be an S corporation
effective Date. Thus, we conclude that X is eligible for relief under § 1362(b)(5).
Accordingly, if X makes an election to be an S corporation by filing a completed Form
2553 effective Date with the appropriate service center within 120 days from the date of
this letter, the election shall be treated as timely made. A copy of this letter should be
attached to X’s Form 2553.

       Except as expressly provided herein, we express or imply no opinion concerning
the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning
whether X is otherwise eligible to be an S corporation for federal tax purposes.

       The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.
PLR-106109-20                               3

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

      In accordance with a power of attorney on file with the office, we are sending a
copy of this letter to X’s authorized representative.



                                      Sincerely,



                                      Mary Beth Carchia
                                      Senior Technician Reviewer, Branch 3
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)



Enclosures (2)
      A copy of this letter
      A copy for § 6110 purposes




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